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OPINION: An Economic Pill Asia Must Eventually Swallow January 26, 2001 By Keith W. Rabin, president of KWR International Inc. Japan has now passed the formerly sacred 4 percent unemployment rate, with few believing it will not rise to 5 percent or more. Other countries face more serious problems. When pressed, however, few will acknowledge that cleaning up the mess with structural reform and reorganization will inevitably mean higher unemployment. This is seen as politically unfeasible, and there is no consensus on the need for dramatic action. The 1997 financial crisis marked a major transformational period for Asia. Faced with a globalizing world economy and the emergence of China as a low-cost export platform, it re-emphasized the need to change their business practices. Korea moved to restore confidence through a dramatic reform program. Thailand, Indonesia and Malaysia also sought to overcome their problems. Japan, possessing a vast savings pool, which helped to mask its economic difficulties, recognized its problems even before the crisis. In 1996, it introduced a comprehensive plan for economic structural reform to promote deregulation and reduce the high cost of doing business in Japan. At the time there was lots of talk about the need for the United States to remain strong until Asia and Europe could take over as the "locomotive" for the global economy. Today, however, despite congratulatory talk of a "V"-shaped recovery, Asian opinion-leaders are increasingly nervous. Their worry is compounded by current volatility in U.S. capital markets, and there is real concern over the possibility of a hard landing in the United States. Japanese stimulus initiatives have helped to promote consumption, but growing public sector debt, approaching an unprecedented 120 percent of GDP, does not make this a sustainable solution. In Korea, over $50 billion in corporate obligations need to be refinanced over the coming year. Thailand, Indonesia, Malaysia and the Philippines also face serious problems. This is not the way it was supposed to happen. While some investors expressed great concern over the collapse of Yamaichi Securities, Daewoo and Sogo, astute observers viewed these bankruptcies as a net positive, believing it demonstrated hard decisions were being made. Structural reform by nature requires great pain. As inefficient companies are shut down, society benefits by allowing the more rational allocation of funds that had been absorbed by zombie-like enterprises, at the expense of emerging industries and smaller companies, which lack access to the capital they require. Many Asian policy makers and executives understand, yet ask for more time. They stress the need to nurture information technology and venture capital, the potential of fiscal solutions and the role of foreign investment. While these are all critical factors, they are not, by themselves, the solution and should not be seen as an alternative to reform. It will take tens of thousands of venture businesses to make up for inefficient sectors such as construction, retail and financial services or conglomerates that lack discipline and focus. Similarly, fiscal solutions are not likely to provide the answer. Americans are often accused of short-term memories and reminded that it took almost two decades to transform the United States from the world's largest debtor to a surplus economy. Yet the pain endured during this time is rarely mentioned. Massive layoffs were a daily occurrence, accompanied by major cuts in social services and rising social tensions. Newspapers were filled with accounts of families "voting with their feet" in search of jobs, and graduates who could not find positions. Cost reductions and re-engineering were the business mantras of the day. When presented with this logic, Asians generally emphasize that Asia is not the United States, and speak of the Asian way. However, in the end there is not a U.S. way, an Asian way or even a European way, but simply microeconomics. Countries, just as individuals, are entitled to sacrifice ruthless economic efficiency for a social good. However, they need to recognize that this comes at a price. No one wants to see the pain that accompanies a massive restructuring. However, Asia does not have the luxury the United States enjoyed of a 20- year reform process. It cannot rely on attrition alone. In some cases, foreign investors who are not beholden to the same sense of social obligation, are being asked to take on this task. One can view the case of Nissan in this light. However, foreign investors are becoming frustrated over the pace of reform and this is reflected in current investment trends. Only a year ago entities such as the Korea Development Bank spurned Ford's request to lower its planned acquisition price for Daewoo Motors by $1 billion. Today it is proving difficult to find a foreign buyer at any price. Foreign investors are undoubtedly part of the solution; however, they will be increasingly reluctant to purchase Asian assets if they are precluded from employment The bottom line is that to move away from the pitfalls of the recent past, Asia must continue to make changes--painful, yet necessary changes. Failure to do so only opens
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